What impact will Interest Rate rises have on your financial future?

The first Bank of England base rate increase in a decade dominated much of the news at the start of November.

When considered against a generally uncertain global economic backdrop, What is the potential impact this could have on your immediate and long-term plans?

Mark Carney, the Governor of the Bank of England, has stated that the increase from 0.25% to 0.5% will likely be the first of a few small incremental increases over the next few years. This suggests that we are highly unlikely to see the previous norms of in excess of 5% anytime soon that were commonplace up until a decade ago.

Immediately any increase in interest rates could impact two main groups. Savers may benefit from a modest increase in the return they get on their savings whilst those with debt linked to the base rate (tracker and variable rate mortgages for example) may see their repayments increase.

Bear in mind, however, that this is a modest increase and, although borrowers living on the breadline will suffer some discomfort, the vast majority affected will see it as a fairly minor positive or negative (depending on which side of the fence they are sitting). Moreover, very few who consider their financial future will have been surprised – this was an inevitable move and was a matter of ‘when’ rather than ‘if ’. Consider this though – borrowing will still be cheap, interest on savings will still be low and, assuming Mark Carney is true to his word, it is likely to stay this way for a while as any sudden large increase in the base rate would have a very destabilising effect on the economy. With easy-access deposit based savings account rates remaining relatively low, this small interest rate rise – even if followed by subsequent additional increases in the short term – is likely to leave the return on cash savings, including Cash ISA’s, as nothing to brag about and, crucially, languishing behind inflation which is currently around the 3% mark.

The security of an emergency fund equivalent to at least 3 months essential expenditure and ample savings to cover any anticipated capital expenses should always outweigh the temptation to chase growth and, for that purpose, low-interest cash savings accounts are perfect.

For any long-term funds, however, a more robust plan incorporating one’s wider goals and planning objectives may be worth considering.

Cash accounts offer, for example, little in the way of inheritance tax mitigation, protection from long-term care assessment and income tax efficiency. Despite the prospect of increased interest rates, a ‘no deal’ Brexit and the many other global factors that could impact our overall economic outlook, it very much remains the case that alternatives to cash ISAs and savings accounts might just offer better options to fit your personal plans now and for the foreseeable future.

A chat with a financial adviser should help to determine how these changes might impact you directly and what alternatives might be worth discussing to keep your planning targets in sight.